Here’s what you need to know about lenders mortgage insurance

For many first home buyers, mortgage lenders insurance can be a necessary step to make their property dream a reality.

However, recent research shows that the term “mortgage lenders insurance” is one of the most commonly misunderstood phrases used in the property market.

That’s the message from the Galaxy Research poll that quizzed more than 1,000 Australians on how much they know about various frequently used home loan terms.

It found that just 33 per cent of respondents understood what the term “lenders mortgage insurance” meant, making it far less well known than other common terms like “interest” (68%), “principal” (48%), “refinancing” (48%) and “line of credit” (44%).

What is mortgage lenders insurance?

In simple terms, lenders mortgage insurance – or LMI as it is often known – allows borrowers to take on bigger loans by charging them a premium to safeguard the lender against a default.

The purpose of this type of insurance, taken out by the lender, is that it enables certain borrowers, like first home buyers, to access financing by adding a one-off cost to their home loan.

That’s because, as a one-off insurance premium, it protects the lender against the potential loss it may incur if the borrower is unable to repay their loan.

When is it required?

Borrowers tend to only pay lenders mortgage insurance on loans that are more than 80 per cent of a property’s value.

However, according to financial comparison site Canstar, individual lenders may require borrowers to provide more or less than a 20 per cent deposit in order to avoid paying the one-off fee.

In essence, the current situation is that different lenders have different rules about when they require mortgage insurance to mitigate their risk.

“When you apply for a home loan, the lender will help you determine if LMI is required. They should also let you know what the approximate cost will be,” a recent ANZ note on the subject says.

How much do you pay?

Lenders mortgage insurance is not cheap.

In fact, it can add thousands of dollars to the cost of purchasing a home, depending on the size of your deposit and the property’s value.

For instance, according to financial comparison site Finder, if a borrower buys a $1,000,000 home using a deposit of $50,000 they could stand to pay $42,000 in LMI premiums.

How can I avoid it?

The best way to dodge paying lenders mortgage insurance is to save a larger deposit.

By holding off on entering the market until you’ve saved a deposit worth more than 20 per cent of the property’s value it’s likely that you won’t have to pay the fee.

Another way may be by using a loan guarantor, such as a family member, who offers equity in a property they own as security for the home loan.